The Commodity Investor: First Physically Backed Copper ETF Good For Investors, Won’t Distort Prices

January 09, 2013

After a long, arduous path to SEC approval, JP Morgan set to launch first-ever copper ETN backed by the red metal itself.


Investors will soon have the option of investing directly in physical copper through the convenience of an exchange-traded fund, just as you can with gold, silver, platinum and palladium.

For many years, investors who wanted to trade copper had limited options: They could either trade the futures contract, which present extreme degrees of leverage and volatility; or they could invest in copper equities, which doesn’t present the most direct investment way.

In 2007, the first futures-based exchange-traded note was approved, iPath DJ-UBS Copper Total Return ETN (NYSE Arca: JJC), which tracks an index that reflects copper futures contracts and that has collected more than $100 million in assets under management. There have since been two other futures-based exchange-traded products: the iPath Pure Beta Copper ETN (NYSE Arca: CUPM) and the United States Copper ETF (NYSE Arca: CPER), both of which just have a few million dollars or less in AUM.

Now thanks to the Securities and Exchange Commission’s Dec. 26, 2012 approval, investors will have access to copper ETF products, similar to ETF products that cover gold and silver, which have collected billions of dollars in AUM and offered investors easier access to bullion.

Regulatory Hurdles

While plans for copper ETFs were drawn up by banks and other financial institutions as early as 2005, it was just a few weeks ago that the SEC approved J.P. Morgan’s plans to launch a copper ETF, dubbed “JPMorgan’s XF Physical Copper Trust.”

J.P. Morgan’s copper ETF will be backed by actual physical copper stored in a warehouse; specifically, the ETF has the ability to be backed by 61,800 metric tons of physical copper metal. No listing date has been offered as of yet, although investors should be ready to start trading this commodity in the first quarter of the year. The path to approval was no walk in the park. The ETF took more than 26 months to get final approval from the SEC, and had to be revised a half a dozen times in order to qualify for the listing.

And not all physically backed copper ETFs that have applied have been approved: BlackRock, the giant financial services firm that sponsors the popular iShares ETF, has yet to see its copper ETF approved by the regulatory authorities. Indeed, many physical consumers such as electrical parts suppliers, car manufacturers and shipbuilders that use physical copper have demonstrated extreme opposition to these copper ETFs. They are concerned storing copper in warehouses for investment purposes will distort the copper market.

Physical consumers of the red metal have written letters to the authorities, held hearings, sponsored seminars, launched media campaigns and done everything in their power to stop copper ETFs from seeing the light of day. While some of their arguments are not valid (for example, one consumer claimed it’s the end of the industrial market as we know it), some of the arguments against copper ETFs are legitimate.




Pros & Cons

Copper ETFs have had a hard time getting approval for a variety of reasons, the primary of which is whether they will harm industrial users. Copper prices over the last decade have been fairly volatile and it’s safe to say that one of the primary drivers has been China. Chinese industrial demand for copper—for everything from housing, warehousing to construction—has helped push prices higher and higher. This has squeezed other smaller consumers of the red metal.

In addition, there is speculation about how much copper China is actually storing in its warehouses—which is an opaque side of the market that is causing much consternation among participants. As a result, many physical buyers are reluctant to see another player enter the market that will hoard additional physical copper in warehouses. The concerns that ETFs will add additional volatility may have some validity.

As financial investors in commodities, readers of The Commodity Investor should be pleased that there is an additional investment option to choose from. True, financial investors will be competing directly with physical consumers, but that is nothing new in the market: We see this interaction every day in commodities ranging from silver to crude oil to soybeans. So all in all, these copper ETFs should be seen as beneficial to investors in the long run.

Buyer Beware

Aside from the debate of whether these ETFs will harm the copper market, financial investors need to read the small print carefully. As of now, we do know that the SEC has approved J.P. Morgan’s copper ETF and that there are others in the pipeline it may still approve. Once these are approved and are listed, investors should carefully examine the fees associated with these products as well as any other financial instruments the ETFs may hold.

Many ETFs hold treasuries or other liquid securities that they use as “rolling” mechanisms, which may dilute or influence returns. As a result, it’s critical to understand the fees, rolling mechanisms and financial instruments that these ETFs will actually be using.


Disclosure: The author doesn’t have any positions in the securities mentioned.

Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the best-selling “Commodities For Dummies,” published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities. He can be reached at [email protected].

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